Housing bubble creates no-win political situation for either presidential candidate

President Obama’s housing policies have been as successful as the circumstances would allow. Back in June I quipped, Obama’s housing policy succeeded wildly by failing spectacularly. Personally, I would have preferred he let the banks go bankrupt, nationalize them, fire management, recapitalize the banking system, and sell them off the bank’s stock when the economy recovered. Unfortunately, the flash-point of the crisis occurred while Bush was still in office, and these institutions were deemed too big to fail. Obama continued Bush’s flawed policies and looked for solutions that did not bankrupt the banks. This left few good options.

Once bank bankruptcy was taken off the table, the natural corrective mechanisms in the system could not be allowed to function. Mark-to-market accounting was suspended so banks could embark on a policy of amend-extend-pretend and hold shadow inventory until the housing market recovered. The needed purging of excessive household debt could not go forward. This paralyzed the economy, and we are still feeling the economic impact today.

Once the decision was made to coddle the too-big-to-fail institutions, the only policy option to reduce household debt was to give trillions of dollars to loanowners through principal reduction. For as distasteful as too-bid-to-fail has been, this option would have been even worse. Stealing from renters and prudent homeowners to give to irresponsible Ponzis might have lead to riots in the streets. I would have participated in them.

The strongest case against the Obama administration’s economic policy goes something like this:

Early on, the Obama administration misunderstood the unusual nature of the crisis. … The precise nature of the administration’s misunderstanding was that the key problem was household debt, and until that problem was solved the economy couldn’t recover.

This misunderstanding was not for lack of people loudly proclaiming it. Further, even if he did understand it, reducing this debt would have either bankrupted the banking system or cost taxpayers trillions of dollars to bailout borrowers who didn’t deserve the help.

… the administration believed that the best and fairest way to fix the housing system was to fix the economy. If people had jobs and tax cuts and unemployment insurance, they would be able to pay their mortgages and they would be able to buy new homes and that would take care of the housing problem.

And realistically, putting people back to work in jobs that pay enough to support mortgage payments is the only long-term strategy that will support house prices and boost the economy. Unfortunately, the loss of demand from rampant mortgage equity withdrawal was never going to be made up by any amount of government stimulus in only a few years.

That did not take care of the problem– it did not come close to taking care of the problem.

So one view is that the administration basically got the crisis backward. You couldn’t fix the housing crisis by fixing the economy. You had to fix the economy by fixing the housing crisis. And the administration’s housing policy wasn’t anywhere near sufficient to do that. This mistake was doubly disastrous because monetary policy, which would normally be a huge driver of recovery, typically works through the housing market, encouraging consumers to buy new homes while interest rates are low. …

That’s nonsense. Trying to “fix” housing has been part of the problem. Short of wiping out the banks, there was no “fix” for housing. Monetary policy has been as effective as it could have been. Low interest rates have prompted responsible homeowners to refinance which frees up their income for more spending. Unfortunately, a few hundred dollars a month to responsible households doesn’t boost the economy as much as giving hundreds of thousands of dollars to Ponzis.

Bubble-inflated house prices created close to $8 trillion dollars of housing equity. The housing wealth effect implies that people would spend between 5 to 7 cents on the dollar of this additional wealth, creating between $400 billion and $560 billion in additional annual consumption. The property taxes on inflated house prices also helped support perhaps $80 billion or so in state and local government spending. For good measure there was a bubble in non-residential real estate that followed in the wake of the housing bubble, which created a boom in this sector as well.

When the bubble burst, there was nothing to replace the lost demand. Residential construction fell by more than 4 percentage points of GDP ($600 billion annually in today’s economy). It fell below normal levels because the boom of the bubble years had led to record vacancy rates. Consumption plunged because the housing bubble equity disappeared. When the wealth was gone, the consumption that it generated also vanished. And, we saw cutbacks in government spending at the state and local level in response to the lost tax revenue.

All of this seems clear and simple. We lost $1.2 trillion to $1.4 trillion in annual private sector demand. Some of this has been replaced by the federal government’s budget deficits, but not enough to fill the gap. So what would have various plans to rescue housing done?

Suppose we had instantly written off all underwater mortgages, would that have kept construction going? That’s hard to see, since the enormous oversupply of homes would still be there.

Would that have sustained house prices? It’s hard to see how or why, the problem is that the bubble had raised prices far above any level that could be justified by the fundamentals of the housing market.

Or better yet, perhaps we should reflate the housing bubble so the Ponzis can go back to stimulating the economy through their irresponsible borrowing — ultimately at taxpayer expense.

In this morning’s New York Times, Binyamin Appelbaum tells the story of the administration’s disappointing housing policy response. It’s worth reading alongside Zach Goldfarb’s September look at the same subject. Together, the articles make an ironclad case that the Obama administration’s housing policies failed to fix the housing crisis, in part because they never really tried to fix the housing crisis.

The two stories make a convincing case that reducing the debts of loanowners is critical to an economic recovery. And it is true that Obama did not give free money to Ponzis in order to accomplish this end. The only real alternative was to foreclose on overextended borrowers and put them out of their debt misery. That didn’t happen because too many on the Left were against it, and the banks couldn’t afford it.

As Appelbaum puts it, while Obama “poured vast amounts of money into efforts to stabilize the financial system, rescue the auto industry and revive the economy,” he “tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest.”

Realistically, this was the only option Obama ever had. If he had given away trillions to loanowners, the Tea Party would have revolted, and I would have joined them along with every renter and responsible homeowner who had to pay the bill.

That’s because, in part, key members of the administration came to the conclusion that they didn’t have good options on housing policy. The politics were terrible, the mortgage servicers were incompetent and the gamechanger options were costly. As Treasury Secretary Tim Geithner told Goldfarb, “We do not believe that there were feasible alternatives available to us within our authority that were better.” …

The right question on housing, then, is not whether the administration’s policies proved insufficient. They did. It’s what would have been better. And that’s not a question that either Appelbaum or Goldfarb conclusively answer. It’s not even a question that the most credible critics of the Obama administration’s housing policies conclusively answer. …

That’s because there is no answer! Moral hazard is the central issue in housing bust. There are only two choices; either (1) you bail everyone out with a massive debt forgiveness program at taxpayer expense, or (2) you foreclose on everyone and reduce their debt while kicking them to the curb. Every other policy option boils down to extend and pretend while the economy heals itself.

The difficulty comes when you try to actually design a debt-forgiveness program. As Sufi writes, a successful debt-forgiveness program needs to target the households “whose consumption behavior would be materially changed.” Unfortunately, that’s hard to do.

WTF is he talking about? We need to target debt forgiveness to the Ponzis because they will spend more? These macroeconomists who want to see more of the “wealth effect” really need to think about what that really means. They are talking about supporting Ponzi borrowing. This cannot be the stable base of a national economy.

Sufi didn’t have an answer. Rather, he concluded his column with a prayer. “If policy makers would acknowledge the drag on the economy from excessive household debt, a fix may present itself,” he wrote. “I’m certainly open to suggestions.”

Here’s a suggestion for you: Foreclose on the delinquent mortgage squatters! What’s wrong with that solution? It’s very, very simple, yet nobody wants to acknowledge it. That harsh reality is even more politically charged than giving away trillions to Ponzis.

And beyond the policy design questions, there’s the political question. Taxpayers don’t mind a broad-based tax cut, or a program to rebuild bridges and roads, or even increased help for the unemployed. But hundreds of billions of dollars that go to the homeowners who got into mortgages they couldn’t afford and stopped paying rather than to more responsible homeowners who scrimped and saved to keep up with their payments? That’s a tough political sell. …

You think?

Doug Holtz-Eakin was the chief economic adviser to John McCain during the 2008 campaign and he proposed a widespread debt-forgiveness plan. The only problem? “No one liked that plan,” he said. “In fact, they hated it. The politics on housing are hideous.” Recall that the Rick Santelli-rant that kicked off the tea party was aimed at the modest, limited housing policies that the Obama administration actually did propose.

All this raises a question: If the Obama administration’s housing policies have been so ineffective and poorly executed, why don’t more Republicans make this critique?

The answer is that the politics of housing are so bad that Republicans have largely chosen to steer clear of the issue. Mitt Romney, for instance, doesn’t have a specific housing plan, much less a plan for debt forgiveness. He began the campaign by counseling, “don’t try to stop the foreclosure process. Let it run its course and hit the bottom.”

I applauded Romney when he made that speech. He told the simple truth and endorsed the right policy to solve the problem of excessive household debt and bring stability to the housing market. Then he wimped out.

Then he reversed himself, saying instead, “the idea that somehow this is going to cure itself by itself is probably not real.”

No, it’s very real. Unfortunately, it isn’t very politically popular. I used to respect Republicans because they used to have the courage to stand up and take the heat for unpopular but appropriate policy actions. Now both parties just pander to their constituencies without regard to the greater good. Sad really.

But he hasn’t endorsed any specific policy measures on the subject, which makes it hard for him to criticize Obama. After all, it’s tough to say the other guy made a mistake by not pursuing debt relief when you also don’t want to pursue debt relief.

The 2012 election is shockingly silent on the issues pertaining to housing. Obama did the best he could given the circumstances, and when Romney proposed the only reasonable alternative, he was forced to back off because it was politically unpopular. I expect both candidates to avoid this issue for the rest of the campaign — despite the fact that the fallout from the housing bubble is probably the greatest economic challenge the country faces today.

15 responses to “Housing bubble creates no-win political situation for either presidential candidate”

Reality is, housing has become a no-win for all homedebtors because a long standing market-driven system has gradually been replaced by a Soviet-style system driven by institutionalized fraud, subsidization, public policy and price controls. As a result, the fed must heavily dillute the value of the money in your pocket just to keep dead men walking.

You said it, El. And as a result of the Sovietization of our RE market smart buyers need to keep an eye on national, state and local commissars for clues as to future actions that will impact the value of their Potemkin homes. If interest rates climb in future, what you can ask from buyers of tomorrow will be much less. If the mortgage interest deduction goes away or is limited, ditto. On the other hand, if Bernanke succeeds in reflating this monster bubble, all your worries will turn into ponies overnight and it’s off to the races. Much (all) of this is beyond your control and utterly unpredictable. Most of the upside will be skimmed off by Wall Street scammers and any downside will appear in your mailbox almost immediately.

Irvine Renter,
You start by wanting to hold Obama’s feet to the fire but end up letting him totally off the hook in a way that makes Ezra Klein (!) look like a badass rightwinger by comparison. My head hurts.

It is simply false to posit that the administration had only two bad choices: letting “ponzis” off the hook through principal reductions or “kicking them to the curb” through foreclosure. There were thousands of recommendations for every shade between. I won’t go through all these because anyone reading this far already knows them. You do too, IR. The worst possible approach is what Obama/Timmay gave us: no justice for fraudsters, no reform for banking, no salvation for underwater homeowners, no jobs recovery. And the RE market is now so utterly jerryrigged that millions more will likely be victimized by overpaying for homes or rentals for years to come, all to feed the bottom line of corrupt financial engineering bloodsuckers with close ties to our elected officials of both parties. Hard to think of what else Obama could have done? No. Had he appointed a literal rag doll to head Treasury the result would probably have been better.

Not all of the “sand states” are equal when it comes to the share of borrowers who are behind on their mortgage loans.

A new report out Thursday from real estate services provider Zillow found that while Florida is not the worst state for negative equity, the Sunshine State’s borrowers have disproportionately high delinquency rates on their loans.

In Miami-Ft. Lauderdale, 43.7% of borrowers are underwater, while 24.9% of them have missed at least three months of payments. In Tampa, where 46.6% are underwater, 17.6% haven’t made payments for three months. In Orlando, it’s 51.9% underwater and 18.2% delinquent.

Compare that with Phoenix, where 51.6% of borrowers are underwater, but only 8% are seriously delinquent, or Atlanta, where 54.4% are underwater, but only 7.8% are seriously delinquent. Even lowly Las Vegas, where a whopping 68.5% of borrowers owe more than their home is worth, only 13.6% are 90-days delinquent. (Zillow’s delinquency figures — which come from credit rating firm TransUnion – jibe with the Mortgage Bankers Association’s figures.) So what is it about Florida? Why are so many more of the state’s borrowers delinquent on their home loans when fewer of them are underwater?

Part of the answer could lie in foreclosure timelines. Florida is the only one of the four notorious “sand states” (the others are California, Nevada and Arizona) that has an exclusively court-based foreclosure process, and the state’s courts have been jammed with thousands of cases. As a result, the foreclosure process is taking longer than ever – an average of 861 days in April – from start to finish.

So even if Florida has a similar rate of default to that of most other states, defaulters stay delinquent longer, so at any given time, there are more of them.

“There are a lot of people hanging out in that pipeline,” says Stan Humphries, Zillow’s chief economist.

Borrowers could also be encouraged to default by others whom defaulting has benefited – if you can live two and a half years rent-free, before they kick you out, why not, right?

“If you’ve been around people who’ve defaulted, you’re much more likely to default yourself,” Mr. Humphires said.

The report contained some good news overall: The number of underwater homeowners fell to 15.3 million, or 30.9% of U.S. homeowners with a mortgage, from 15.7 million, or 31.4%, in the first quarter of the year. That means 400,000 fewer people owe more than the value of their homes.

That’s great news for those homeowners whose household balance sheets are on the mend. It means they will likely have better access to credit (you can’t take out a home equity loan if you don’t have any equity), and multiple studies have found that underwater mortgages are a leading cause of strategic default, which is generally bad for communities.

The California Association of Realtors (C.A.R.) is not the only state-specific Realtor group to be suspicious of FHFA’s REO Initiative involving the bulk sale of REO inventory to institutional investors.

The Florida Realtors stated that it has “expressed concerns to The National Association of Realtors® (NAR) about the issue and is requesting member feedback on how the FHFA bulk sales issue affects the Florida market.”

According to the trade group, 775 homes in July had winning bids from buyers, with 190 in Central and Northwest Florida, 418 in Southeast Florida and 167 on the West Coast.

According to C.A.R., the program calls for the sale of nearly 500 Fannie Mae-owned foreclosures in the Los Angeles and Inland Empire areas.

C.A.R. president LeFrancis Arnold said Fannie Mae and FHFA are moving forward without revealing details such as who the winning bidders are, where the properties are located, and what the sales price is.

C.A.R. has argued that the program is not necessary for the state because inventory is low. In a recent report, C.A.R. stated the months’ supply of REOs is down to 1.5-months.

Despite low interest rates, low prices and slowly rising sales, first-time homeowners accounted for just 34% of all buyers in July, according to data released Wednesday by the National Association of Realtors. While that figure has inched up slightly from the month and year prior, the association says first-time home buyers account for 40% of purchasers under normal conditions.

The reluctance of newcomers to enter the market may be further adding to housing’s woes. After all, first-time buyers are vital to boosting sales, especially during downturns, since when they buy a home, they aren’t also selling a previous home to finance the purchase.

Their recent absence is largely due to the current challenges of saving up enough for a down payment: In a survey released in June by Trulia, an online real estate marketplace, 47% of all adults who aren’t homeowners and who wish to buy a home said that the down payment is the biggest obstacle to entering the housing market. Most mortgages require at least a 10% down payment, and in some pricey markets, like New York and San Francisco, coming up with that cash can take years, says Jed Kolko, chief economist at Trulia. A poor credit history, which makes it difficult to qualify for a mortgage, was the second most common issue holding back would-be first timers, according to Trulia’s survey.

Many potential buyers are also facing higher unemployment rates than other groups. The unemployment rate among 25- to 34-year-olds stood at 8.2% in July, compared with 6.9% for 35- to 44-year-olds and 6.5% for 45- to 54-year-olds, according to the Bureau of Labor Statistics.

Separately, first-time buyers are competing against investors—who tend to have all-cash offers and who go after the same, lower-price homes, says Leonard Baron, real estate lecturer at San Diego State University. Sellers who are eager to unload their homes are more willing to work with investors, since the sale doesn’t hinge on a bank’s decision to approve them for a mortgage. More recently, experts say, tight inventory has made it even harder for first timers to compete.

In the past, government intervention encouraged more first timers to buy a home. They accounted for nearly half of all purchases during the first half of 2009 through spring 2010, according to the NAR. That spike was partly attributable to the federal government’s $8,000 tax credit for first-time home buyers.

But there was also a larger supply of homes to choose from at that point, says Walter Molony, a spokesman for the NAR. Going forward, experts say, a larger economic recovery will have to occur in order for more lifelong renters to become home buyers. And more lower-price-range homes—in particular, foreclosures and other distressed properties now being held off the market—need to go on sale, says Molony.

It’s August. 2 1/2 months to go.
I don’t expect much to be mentioned about housing policy for the next 2 1/2 months up to election day. “Hideous” is a good word for the political situation around housing.
Neither side has clean hands.
And the race is tight enough that both are just trying desperately not to say something completely and utterly stupid and alienating about the state of the housing market and proposed solutions. Worse, they don’t want any affiliate to say something completely and utterly stupid either.
Meanwhile, convention in Florida, which in terms of foreclosureville over the last 5 years is a close second best to Nevada.

In Florida, the overhang of foreclosures will be the elephant in the room. As the articles linked above show, housing is the most important issue facing Florida voters, yet neither candidate will touch the issue. Ironic that the convention should be held there.

The 65% club!
I bought a home 2 years ago. But I’m not a homeowner.
So yeah, I probably should be in the 35%.
I think it’s really cool when people really “own” their property outright, i.e. no lien.
Must be a nice feeling.
I’ve met a few people like that, but seems pretty rare.

In the last several decades, the myth of the homogenous suburb has eroded. This is especially true for immigrants. In 2000, researchers discovered that 52 percent of immigrants in metropolitan areas were living in suburbs. One facet of this transformation has attracted less scrutiny: over the last quarter century, hundreds of thousands of Asian migrants have arrived in the suburbs.

The best place to witness this rapid transformation is in the suburbs east of central Los Angeles, an area known as the San Gabriel Valley. In 1980, few would have imagined that the region would today be a cluster of majority and near-majority Asian suburbs. Here’s a demographic snapshot of the Valley in 1980:

Only in Monterey Park did Asian households approach even a third of the population. The other Valley suburbs, like South Pasadena (8 percent), Rosemead (7.3 percent), and Alhambra (9.4 percent), remained in the single digits.

By 1990, a far more noticeable transformation had begun, as the following map shows:

Monterey Park became the first suburb to turn majority-Asian, with an Asian household percentage of 53.2 percent. Sociologist Timothy Fong dubbed it “the first suburban Chinatown.”

Rosemead jumped from 21.9 percent in 1980 to 29.2 percent. There were similar increases in Alhambra (31.9 percent) and South Pasadena (15.7 percent). Even suburbs with very small Asian populations in 1980 saw huge spikes. Arcadia went from 2.7 percent Asian-headed households to 16.5 percent; San Marino from 5.1 percent to 23.7 percent, and San Gabriel from 6.43 percent to 27.1 percent.

Outside the San Gabriel Valley, in Los Angeles County as a whole, the change was much more gradual. The percentage of Asian households grew from 4.9 percent in 1980 to 9.3 percent in 1990, which made the neighborhoods of the San Gabriel Valley even more demographically remarkable. Many new Asian immigrants who settled there bypassed the conventional suburbanization process of first settling in ethnic enclaves in the urban core and moving outward to the suburban periphery over time. In the San Gabriel Valley, suburbs were the new ethnic enclaves and frequent first destinations.

These trends continued into the new millennium. As the 2000 map shows, the growing number of suburbs where Asian households were a third or more of the population (indicated with the darkest purple) reflected increases in concentration and dispersion of Asian settlement.

One other Valley suburb, Walnut (not pictured), joined Monterey Park and became majority-Asian, with an Asian household percentage of 53.1 percent. Rowland Heights was close, at 49.8 percent. In 1980, they had only been 7 percent and 9.4 percent Asian, respectively. As for Monterey Park, its percentage of Asian households reached 60.7 percent by 2000, twice what it was in 1980.

The rapid Asianization of suburbanization occurred alongside steady Latino migration. In some San Gabriel Valley suburbs, the new Asian arrivals lived alongside Latinos (both multi-generational and immigrants) and whites. In these “tri-ethnic” suburbs, demographic transitions were often marked by some tension. In other suburbs, the neighbors of the new Asian arrivals were mostly white. (More disturbingly, with a few major exceptions like Pasadena, black households typically made up less than 5 percent of households in these suburbs.)

Since 2000, more than a half-dozen additional suburbs in the region have become majority-Asian.

The “real” homeownership rate, which we define to be the percentage of households who own a home and are not 90 days or more delinquent on their mortgage, has fallen to 62.1%, which is the lowest level in almost 50 years.

The 65.5% homeownership rate published by the U.S. Census Bureau greatly overstates the real level of homeownership in the country, as the Census Bureau counts all 3.8 million homeowners who are 90+ days delinquent on their mortgage as homeowners. Despite herculean efforts by the Administration to save homeownership for these people, most of them are really just renters in waiting.

Historically, the spread between the published and real homeownership rates has been slightly below 1.0 percentage point, even in a strong economic environment there is always some level of delinquency. The spread has widened for many reasons, including:

* The tremendous economic downturn that caused significant financial pain to many borrowers
* Understaffing at the banks, who cannot deal with the huge inventory of delinquent mortgages and the complications of loan modification or foreclosure with so many parties involved
* Banker fear of fees, sanctions and even jail time (in Nevada) for not properly documenting the foreclosure process
* Dealing with many Federal government attempts to intervene in the process, requiring documentation of modification attempts such as HAMP or HARP
* Clever borrowers, who have figured out how to live for free for months and even years

We are confident homeownership will come back. Our survey of 20,000 consumers, and many surveys by others, confirms that the American dream of homeownership is as strong as ever. Additionally, in states where the foreclosure process has moved more smoothly than others (such as Arizona and Texas), we are seeing foreclosed homeowners return as home buyers after the 3-year waiting period required by most mortgage programs.

In summary, let’s stop pretending that 65.5% of Americans own their home, recognize that the real number is 62.1%, and move forward with responsible mortgage programs that allow responsible Americans to achieve the American dream. That dream needs to start with households cleaning up their credit, paying down their debts, saving a down payment, and taking advantage of the lowest mortgage rates in history to buy the home of their dreams.

The problem with forclosing on squatters is, that will drive prices lower, so all those neighbors on the fence scraping by… That is say 5-10% underwater will become 10-15% underwater and those 20% underwater might get pushed into strategic defaulting. You would have a domino effect of falling home prices, increased fear selling and massive startegic defaulting. This will keep snowballing until entire neighborhoods are squatting. Hope of rising prices is the only thing keeping peope from squatting all over the nation.

[…] recently wrote that the housing bubble creates a no-win political situation for either presidential candidate. Despite the political minefield housing policy creates, Mitt Romney has published a very brief and […]

[…] recently wrote that the housing bubble creates a no-win political situation for either presidential candidate. Despite the political minefield housing policy creates, Mitt Romney has published a very brief and […]